Question

Federal Semiconductors issued 10% bonds, dated January 1, with a face amount of $870 million on January 1, 2021. The bonds sold for $800,199,358 and mature on December 31, 2040 (20 years). For bonds of similar risk and maturity the market yield was 11%. Interest is paid semiannually on June 30 and December 31. Federal determines interest at the effective rate. Federal elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $780 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2022 had risen to $786 million.

Required:

Complete the below table to record the following journal entries.
1. & 2. Prepare the journal entries to adjust the bonds to their fair value for presentation in the December 31, 2021, balance sheet, and adjust the bonds to their fair value for presentation in the December 31, 2022, balance sheet. Federal determined that none of the change in fair value in 2021 was due to a decline in general interest rates and one-half of the increase in fair value in 2022 was due to a decline in general interest rates.

Semiannual Interest Period-End Cash Interest Paid Bond Interest Expense Increase in Balance Carrying Value Fair Value Unrealized Holding Gain (loss) 01/01/2021 $800,199,358 06/30/2021 $0 0 12/31/2021 0 0 $780,000,000 06/30/2022 0 0 0 12/31/2022 0 0 0 $786,000,000 Bonds Payable Fair Value Adjustment 01/01/2021 800,199,358 01/01/2021 06/30/2021 06/30/2021 12/31/2021 12/31/2021 800,199,358 0 06/30/2022 06/30/2022 12/31/2022 12/31/2022 0 800,199,358

  

Answer 1

Bond Interest Paid Increase in Balance Carrying Value Fair Value Unrealized Holding gain (Loss) 12 Semiannual Interest Cash Interest Paid Period-End 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 13 780,000,000 43,500,000 43,500,000 43,500,000 43,500,000 21,249,390 800,199,358 800,710,323 801,249,390 801,818,107 802,418,103 44,010,965 44,039,068 44,068,716 44,099,996 510,965 539,068 568,716 599,996 786,000,000 16,418,103 Bonds Payable Fair Value Adjustment Net Liability (FMV) 1/1/2021 6/30/2021 12/31/2021 1/1/2021 6/30/2021 12/31/2021 800,199,358 510,965 539,068 801,249,390 568,716 599,996 802,418,103 21,249,390 21,249,390 780,000,000 6/30/2022 12/31/2022 6/30/2022 12/31/2022 16,418,103 16,418,103 786,000,000 2021 30-Jun Interest expense 44,010,965 Discount on Bonds Payable Cash (to record payment of interest and amortization of discount) 510,965 43,500,000

2021 31-Dec Interest expense 44,039,068 Discount on Bonds Payable Cash (to record payment of interest and amortization of discount) 539,068 43,500,000 21,249,390 31-Dec Fair Value Adjustment Unrealized Holding Gain 21,249,390